6 ways NOT to pay off holiday credit card debt

If you're suffering from a case of post-holiday
credit card bill guilt, you're not alone. While making good on your resolution
to pay down your debt is a terrific goal, you want to make sure you do so in a
way that actually improves your overall financial status. In other words, think
twice before resorting to these sketchy debt pay-off plans:

1. Dipping
into retirement savings
There
are two ways people tap retirement funds that don't serve their long-term
interests, explains Kelley Long, a CPA,
financial planner and spokeswoman
for 360 Degrees of Financial Literacy. "The first way is through a 401(k)
loan," she says. "Not
only are you sacrificing growth in your retirement funds while you pay off the
loan, but if you leave your job before the loan is paid back, you'll owe the
entire balance immediately -- and you can't pay it back with a credit card."

The
other unwise decision is to withdraw from your individual retirement account.
The 10 percent early withdrawal penalty alone can end up costing more than any credit card
interest.

Better
move: Take money out of savings
Interest rates on savings
accounts and short-term investments are still low, so "borrowing" from yourself and replenishing
the account over time can help repair the damage if you've overspent during the
holidays, says Kasey C. Gahler, a Texas-based certified financial
planner. "Just don't bring your savings
down to zero," he warns, since you should try to keep a healthy emergency fund
intact. He recommends socking away three to six months' worth of living expenses -- or
even more if you're working in a field with high layoff potential -- so you don't go deeper into debt because of unexpected bills or loss of income.

2. Using a home equity
line of credit
Low interest
rates can make borrowing against your house via a home equity line of credit
seem attractive -- especially since the loan interest is usually tax deductible. But
using this tactic can be tricky. "You're paying for debt with different
debt," says Gahler. "The issue is not necessarily what the interest
rate is, but that you're playing a shell game."

Better
move: Increase your earnings
Instead
of moving your debt around, make a concerted effort to pay it off faster.
"Picking up a side job to make some extra money or volunteering for some
overtime can help you pay those expenses off as quickly as possible," says
Gahler.

You
can increase your take-home pay by increasing your allowances temporarily -- as
long as you usually get a tax refund. This will give you more
disposable income to put toward paying off those holiday bills quickly.

--
Paula Langguth Ryan
Author, "Bounce Back from Bankruptcy"

3. Taking
out a payday loan
Payday
loans are essentially very high-interest loans that provide an advance on your
paycheck, so be sure to read
the fine print, says Long. "These loans come with big fees, and you'll end up
paying more in the long run than if you just waited until you're paid to pay
off the credit card,"
she adds.

Better
move: Make adjustments to your paycheck
There
are ways to alter how much income tax you pay on a short-term basis. "You
can increase your take-home pay by increasing your allowances temporarily -- as
long as you usually get a tax refund," says Paula Langguth Ryan, author of
"Bounce Back from Bankruptcy." "This will give you more
disposable income to put toward paying off those holiday bills quickly."
In a similar vein, if you expect a tax refund, you could file your return early
so you can get the money to help accelerate your payoff plan.

4. Paying
off your cards without a planIf
you owe a balance on more than one account, choosing an amount each month and
divvying it up equally among accounts is not advisable, says Gahler. The same
goes for paying just the minimum amount due on your accounts. "It will be
hard to get out of debt for the long term that way," he says.

Better move:
Focus on the highest interest rate card first
"You want to have a laser focus on the highest interest
rate first. Once that is paid off, go to the next highest rate," says Gahler.
The idea is that you want to rid yourself of the debt that's costing you the
most as soon as possible. Just be sure to maintain on-time minimum payments on your other
accounts. Of course, if you have a small balance that's easy to pay off, go
for it, so you can enjoy the satisfaction of crossing that one account off your
list, says Gahler.

5. Transferring balances
Using balance transfers can be an efficient way to pay off a debt using a lower
or zero interest rate card. The
danger lies in the limited promotional period. People often end up using the
new card for additional spending without paying off the original balance before
the introductory period expires. "Not only do they transfer the old
balance, but they accrue even more," says Long. And, adds Gahler, with
every new account you open, your credit score will take a temporary hit.

Better
move:Use
transfers sparingly, and crunch the numbers first
You may receive a low promotional
interest rate on a new balance transfer card, but don't forget that you'll also
pay a fee, which is usually 3 percent to 5 percent of the amount you transfer. "This fee is often more than the amount of interest you'll save by
transferring," says Long, so use a
balance transfer calculator
to see if it's worth it. If it makes financial
sense to go this route, stay disciplined with your monthly payments, and circle
your "Debt Free Date" on the calendar to stay motivated.

6. Borrowing from family
Relatives
are preferable to some other lenders, but there are still caveats. Even if a
family member offers you a loan without interest, it can make for awkward
encounters if you don't pay it back in a timely manner.

Better move:
Save for the holidays all year long
"Take a couple of minutes to go
through what you spent this past holiday season, and tally it up. Then divide that
total by the remaining months of the year, and try to build it into your budget
to put that amount away each month," says Gahler. By December, you'll have a nice amount
set aside for cash-only holiday spending.

Ultimately, there isn't a
quick fix for getting out of debt, which is why it's important to treat your
financial goals more seriously than a fleeting resolution, says Ryan. "Focus on a plan that has longer-term benefits for
you, which is getting out of debt, and not relying on credit anymore."

Updated: January 14, 2014

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